As the world’s started to move on from the coronavirus pandemic, the oil price has recovered. It recently jumped above $70 per barrel. This seems to suggest the worst is behind the BP (LSE: BP) share price. Unfortunately, in my opinion, the company isn’t out of the woods just yet.
BP share price challenges
While I think it’s good news the oil price has recovered substantially in the past six months, energy companies like BP may still have to overcome some significant challenges in the months and years ahead.
For a start, the pandemic isn’t over yet. The world is still fighting off the Delta strain, and we could see other more dangerous mutations develop before Covid-19 is extinguished for good. If another variant leads to more economic shutdowns, the price of oil could fall again.
The other challenge BP faces concerns renewable energy. It’s clear the world is starting to move away from oil and gas as energy sources. It’s unclear how long this transition will take, but momentum is starting to build.
BP needs to change with the times, or it’ll be left behind. The group’s investing more in renewable energy and plans to establish a pipeline of related projects totalling 20GW by 2025 and 50GW by the end of the decade.
Ironically, a higher price of oil will help the company accomplish these goals. Thanks to higher prices, underlying replacement cost profit (its preferred measure of profitability) was $2.8bn in the second quarter. Profits totalled $2.6bn in the previous quarter. With profits rising, BP has more cash available to invest for growth.
Is the worst behind the company?
So what does all of the above mean for the BP share price? Broadly speaking, I think the worst is now behind the company. However, it can’t guaranteed this is the case.
The company will have to overcome some significant challenges in the years ahead to navigate the renewable energy transition. The price of oil may also remain volatile.
Nevertheless, the group’s now laid out a clearly-defined strategy for moving away from oil and gas. Management published this strategy in August last year. Since then, it’s become easier for investors to determine what the future holds for the enterprise. And as the company pushes ahead with its renewable energy plans, its reliance on the price of oil should decrease.
Overall, while I’d hesitate to say the worst is definitely behind the BP share price, I think the company’s fortunes are almost certainly looking up. With that being the case, I’d buy the stock as a speculative position for my portfolio.
I think the market’s overlooking the company’s potential and concentrating too much on the risks associated with the business. This could present an opportunity for long-term investors.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.